Reflecting years of financial instability, Louisiana’s credit rating was downgraded Thursday afternoon by Moody’s Investor’s Services for the first time since after Hurricane Katrina.
The lower rating means the state will have to pay higher interest rates when borrowing money.
Louisiana’s credit rating dropped a single notch from Aa2 to Aa3, but it puts the state’s rating behind other states with better financial outlooks, said David Jacobson, Moody’s spokesman. The only two states with worse credit ratings from Moody’s are New Jersey and Illinois.
The downgrade came even as the state Legislature made progress in addressing the immediate financial crisis for this fiscal year, attempting to fill a $900 million budget deficit. The Louisiana House, which is seen as the largest hurdle, advanced a 1-cent sales tax hike that is a critical part of Gov. John Bel Edwards’ tax plan to close the historically large midyear gap, as well as a $100 million cut to the budget that ends June 30. Both measures still need the state Senate’s approval.
Edwards, who took office Jan. 11, blamed the downgrade on bad budgeting practices of Bobby Jindal’s administration.
“This is a disappointing development, particularly since we believed that Moody’s would wait until the conclusion of the special session to make any decision on our rating,” Edwards said in a statement. “Unfortunately, the downgrade confirms what we’ve been saying about the structural imbalance of our budget. The overuse and abuses of one-time money and fund sweeps by the Jindal administration were a major factor in this decision.”
The downgrade is applied to the state’s general obligation bonds and gas and fuel tax bonds. That means when the state issues bonds, as it does almost ever year, to pay for various construction projects like roads and buildings, it will be assessed higher interest rates and end up paying more money to pay off its debts.
Treasurer John Kennedy said he will be issuing another round of bonds in June or July of this year to fund various capital projects that will be included in the state budget.
Kennedy said he was surprised Moody’s acted before the Legislature finished the special session, which is scheduled to end March 9. He was hopeful the ratings agency would give the new administration and Legislature time to reverse the previous administration’s course.
But he said the use of one-time money to plug this year’s budget deficit was not well-received.
“You can’t spend more taxpayer money than you take in for seven years in a row and not expect a downgrade to your credit rating,” Kennedy said. “You also can’t make public statements about suspending TOPS, ending LSU football, closing Nicholls State University and closing five prisons without scaring the daylights out of the credit rating agencies that grade our debt and the institutional investors that buy our debt. What we tell our children is true: Acts have consequences.”
Specifically, Moody’s took issue with the looming financial crisis in 2017, which will open with a $2 billion budget shortfall. It also noted the state’s reliance on oil and natural gas and large, unfunded pension liabilities, according to a report.
Making matters worse, Louisiana also received a “negative outlook” from Moody’s — meaning that the state is in danger of being downgraded again.
The report stated that continued budget gaps and the failure to “contain costs related to the state’s Medicaid system” could lead to another downgrade.
Louisiana has not seen a rating change from the other two major financial rating agencies: Fitch and Standard & Poor’s.
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